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The ugliest truth about California’s newest, gimmick-ridden budget, is that it doesn’t address the looming public employee pension issue. Adam Summers, a Reason Foundation policy analyst, gave some figures in the Orange County Register, explaining that these pensions have been “recently pegged at up to roughly $500 billion — roughly $36,000 for every household in California”:

Throw in the $50 billion or so in unfunded retiree health care liabilities, a $10 billion unemployment insurance fund debt, and the state’s $152 billion in general obligation bond debt, and you start to get a fuller sense of the state’s true financial problems.

The current plan to deal with this — reducing pensions for new state hires back to 1999 levels — Summers says was tried before, and failed. And by “failed” I mean revised after the fact and retroactively negated by the state Assembly.

Summers says there’s only one way out:

Politicians can’t continue to merely nibble around the edges of the state’s pension crisis. It’s time to admit that the 401(k)-style retirement plans that are good enough for nearly every private sector worker are going to have to be good enough for state workers, too.

But do politicians have the guts or the principles required? An initiative is needed. No level of government should be allowed to offer any pension not fully invested at the time of wage or salary payment — or promising a specified pay-out.

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8 Comments

You are right. A defined contribution plan such as a 401-k is the only solution for the future. however, we are stil fced with a huge shortfall under the present defined benefit approach. I don;t know the answer except possibly a Bond funded payout to copnvery prospective benefits of employees for benefits already “earned” Yes, Devined Benefit plans should be banned.In both Government and provate venues. There shuld be no cost of living provisions. All pensions shuld be fiscally sound. Itmay take bankruptcy to get from here to there.I’m sure that we wont getit through collective bargaining. MB

This country had defined benefit retirements starting in the late 1930’s. Now private enterprise wants to take that away from you. It worked before and it can work in the future. Private enterprise workers are not bright bulbs. They want everyone to retire in poverty so the richest 1% can get richer. Fools.

Charles Sainte Claire is correct once more. Many private enterprise workers have been led to believe that they too may be able to claw their way into the top 1% of all earners in our country, so they shouldn’t support anything that smacks of “class warfare” because it might eventually affect their own riches.

Poppycock! This is nothing more than the newest episode of the continuing bait and switch perpetrated against the working people in this country. We’re becoming a more Russia like oligarchy every year.

What do the Colorado Legislature and Bernie Madoff have in common? Both stole retirement benefits that were earned over many decades.

We have 80-year old widows in Colorado, who worked hard for the State for thirty years, who trusted the State and made their pension contributions like clockwork for decades, only to see their contracted retirement incomes stolen by the State. This money was taken out of their pockets because the State failed to make pension contributions as recommended by their own actuaries, to the tune of $2.7 billion in the last seven years. If the state had responsibly followed the recommendations of its actuaries, the PERA trust funds would now be more than 90 percent funded. The Colorado pension shortfall is primarily a result of legislative action over the last decade, Bill Owens, et al, in 2000 cut contributions and allowed the purchase of cheap service credit, and now the Legislature wants retirees to bear the cost of legislative ineptitude. In testimony to the Legislature even the proponents of the reform bill acknowledged this historic under-funding of the pension. PERA claims that the pension fund was unsustainable without their actions, because the funded ratio of the pension stands at 68 percent. However, the funded ratio of the pension was in the low 50 percent range in the 1970s, and the pension still exists. If a funded ratio of 68 percent this year is unsustainable, how has the pension been sustained since the 1970s when the funded ratio was in the 50s? Not much of a rationale for breaking retiree contracts.

If you find yourself short on funds, you rearrange your spending priorities, or raise additional revenue, YOU DON’T BREAK CONTRACTS! Why would the Colorado Legislature choose to break pension contracts before breaking other contracts, such as construction contracts? How can a state that is in default, that breaks contracts, maintain its credit rating?

The fact that what Colorado did to public sector employees in this year’s pension reform bill (SB1) cannot be done to private sector employee pensions under I.R.C. Section 411(d)(6), says quite a lot about the moral underpinnings of SB1. This federal “anti-cutback rule” for private sector DB plans permits changes to the plans only if the changes operate on a prospective basis.

Colorado PERA’s actions make it clear that the time has come for the inclusion of public defined benefit plans under all Internal Revenue Code Qualified Plan requirements. It is now obvious that allowing the states to regulate public defined benefit plans does not afford equal protection to state and local government employees.

PERA has put it in writing in pension plan materials over the years, that the COLA “is guaranteed”. Members purchasing service credit gave PERA thousands of dollars based on these materials. Money that they could have left in their 401Ks. PERA officials now claim that the members cannot rely on their pension plan documents regarding their defined benefits. However, Goldman Sachs recently paid a half billion dollar settlement to the SEC based on promises made in plan documents. Apparently, some judges believe that plan documents can set forth contractual terms. In any event, the contractual pension language is set forth clearly in Colorado law.

Colorado’s retiree COLA (and those of 36 other states) are “automatic COLAs” as opposed to “ad hoc COLAs” (which exist in about a dozen states and can be periodically altered.) Colorado’s COLA of 3.5 percent is guaranteed in Colorado law in an identical fashion to the base retirement benefit itself. So, the PERA retiree’s claims are based on both statutory language and plan documents. This 3.5 percent COLA won’t look so hot in the coming years if inflation spikes.

The Colorado pension reform bill’s (SB1) proponents should accept that states cannot legislate away a debt for work that was completed in the past. What the state is attempting is a claw back of deferred pay. The bill’s sponsors should accept that states cannot avoid their contractual obligations simply because they prefer to spend resources on alternative public services or obligations.

Some pension reform advocates argue that public sector pensions should be held to the same standards as private sector pensions. My response to that is “I agree wholeheartedly!” Under the federal Internal Revenue Code reducing accrued pension benefits for private pensions is illegal. If the public sector PERA pension were covered under this I.R.C. law and held to the same standards as private pensions, then last February’s theft of accrued benefits by the Colorado Legislature would not have been attempted. Essentially, federal law provides higher protection to private pensions than it does to public sector pensions. Public pension members are forced to appeal to the courts to prevent the theft of their benefits. (Happening.)

Members of the Legislature pointed out many times, to no avail, that the so called “pension reform bill” was a violation of contracts to which the State was a party. Here are some examples (on tape from the floor debate):

Rep. Lambert: “I have heard from my constituents, as many of you have, that this proposal will breach retiree’s contracts.”
Rep. Swalm: “We’re breaking new territory in this state by trying to reduce the COLA. We’re probably going to get a lawsuit out of that. If we cut the 3.5 percent COLA there will be a lawsuit.
Rep. Gerou said that it is a disservice to the state to rush a bill through when her committee knew that it will go to litigation, and said what we are doing to the retirees is wrong.
Rep. Delgroso said that it is tough for him to tell people that he is going to break their contract.
Senator Harvey said “We have made a commitment. We have a contract with current retirees. That is already in place. Reforms should be made for new hires. We do not have that commitment to new hires.
Senator Spence said “The bill places an unfair burden on retirees.”
Senator Scheffel said “We are breaching our promises to existing retirees.”
Senator Lundberg said “This bill is a deal that was cut before this body met.”

The cavalier abandonment of contractual obligations brings shame to the state of Colorado, aligns Colorado with Third World countries like Bolivia. No person, Republican or Democrat should countenance the breach of contracts. Conservatives support contract law as the foundation of capitalism.

So, why is the SB1 theft more egregious than the Madoff theft? The Colorado Legislature stole money from retirees who are less well off than Madoff’s pre-qualified hedge fund clients.

The Madoff victims were taking risks to seek a higher return on their investments, the Colorado PERA victims simply trusted that their contracts would be honored.

Colorado PERA and the Legislature justified their theft on false premises, citing 2008 market numbers when they knew the markets had recovered approximately 20 percent in 2009. PERA’s General Counsel stated on tape before the 2010 legislative session began that he expected a pension return “north of 15 percent”) for 2009.

It appears that Colorado PERA used the very resources of PERA members to hire a team of lobbyists (up to a dozen) to take earned benefits from those same members. That’s just insane.

Many members of the Legislature acted in ignorance. Spoonfed by the lobbyists, they ignored the legal rights of PERA retirees, and swallowed whole without question the assertions of PERA’s CEO and its chief legal counsel. If the members had read any case law, (for example, the state defined benefit pension case law summary by Prof. Amy Monahan at the University of Minnesota School of Law, Google it!), or even the 2004 Colorado AG opinion on pension benefits (retiree benefits are inviolate) they would not have supported the bill.

PERA’s own General Counsel was quoted in a 2008 Denver Post article as follows: “The attorney general’s opinion seems clear that fully vested employees — those retired or with enough years of service to retire — cannot see any benefits reduced, including cost-of-living adjustments, Smith said.”

Although members of the Colorado PERA Board of Trustees are fiduciaries, charged to act only in the interests of the members and the retirees, they recommended SB1, acting primarily in the interests of PERA employers who were concerned with keeping their contribution rates low.

Adding insult to injury the Legislature stole more money than it needed. The pension theft bill sought to increase PERA’s funded level to 100 percent, although an 80 percent funded level is considered well-funded among pension experts. You don’t have to pay off your mortgage tomorrow, and PERA doesn’t have to pay off all of its pension obligations tomorrow.

There were many other options available to address the pension shortfall, options that have been adopted, or are under consideration in dozens of states. See the legal, prospective pension reform that was accomplished in Utah this year.

Members of the Legislature have taken an oath to uphold the constitution and yet voted to violate the Contract Clause and the Takings Clause. Proponents of the bill refused to see that the retiree COLA (annual benefit increase) is set forth in Colorado law with the same force, status and weight as is the base retirement benefit. Only tortured legal reasoning, and wishful thinking, lead them to believe otherwise.

The Legislature had the ability to investigate the legality of its actions up front, but chose to act with no legal advice. Throughout the floor and committee debates on SB1 the members displayed an ignorance of, or an intentional disregard for the relevant case law. They failed to conduct the due diligence expected of an elected body. State legislatures across the nation are examining the legal limitations on their actions regarding pension reform, exploring all legal options prior to acting. (PERA claimed to have a legal opinion to justify their actions, but never released it.)

PERA has been disingenuous by claiming that the reform bill represents “shared sacrifice” among employees, employers, and retirees, by not making it clear that retirees bear most of the burden of their proposed reforms, for many retirees the confiscation of benefits will reach one-quarter of their total retirement benefits received over the rest of their lives. In debate, the bill’s sponsors said that retirees would bear 90 percent of the cost of the reform. In any event, I am not relieved of my contractual obligations just because someone else has better terms in their contract. The entire premise is ludicrous.

While ignoring its own contractual pension obligations (underfunding of $2.7 billion in the last seven years according to PERA’s own actuaries) the State of Colorado has pumped half a billion dollars into pension obligations that are not its responsibility, those of local governments (Old Fire Police Pension obligations).

The Legislature made a pact with unions to support the “pension reform bill” (SB1) to protect union jobs. Incredibly, these union members tossed their former members, their retired “brothers” under the bus. From the beginning the plan was “let’s steal the money we need from retirees.”

Finally, Madoff eventually admitted to his crime, but the Colorado General Assembly is still pretending that their theft of pension benefits is something to be celebrated. They tout it as a “bi-partisan accomplishment. This will be a long-standing embarrassment to and black mark on our state.

The California Retirement Fund (Cal PERS) has been mismanaged virtually from inception. People complain about this huge “unfunded liability”. That is exactly where the problem lies. During my working life I spent 23 years working for a public utility that was allowed to subscribe to Cal PERS. I put up my 6.75% and my employer was supposed to contribute an equal amount toward my retirement. Now the problem. Although we as employees had no choice but to pony up our share, the agency that I worked for was excused from their responsibility because the investments by Cal PERS were yielding a terrific return. When the economy goes south and the investments no longer perform as they previously had, the state then goes to my former employer and demands they chip in their now again required share. They balk saying that they didn’t budget for it and are then forced to raise utility rates and lay off employees. Now we go one step further and take this to the state level. Since the state of California operated in the same manner as my employer, that is, they didn’t pony up their share when times were good, they now have a huge unfunded liability of their own creation. It didn’t have to be this way, they created the problem. Enter the state spin doctors crying about the greedy employees and retirees and our lush benefits. They cry the state is broke and we can’t continue paying out these benefits. I have no sympathy for the state officials who failed to live up to their responsibilities but feel bad for the citizens of California who now have to clean up this mess.
The solution is going to be painful for all concerned. First, since there is already a hiring freeze, we need to increase the number of days off without pay for all state employees. Second, wholesale elimination of some state departments and a 10% cut in welfare and unemployment benefits. Next, the automatic deportation of any and all illegal aliens who are abusing state benefits. This means students enrolled in public schools, those literally breaking our hospitals, those collecting welfare, etc. Now for my side of the ledger. All current retirees in the Cal PERS program also take a one time 10% cut in retirement checks and until the recession is over, cost of living adjustments that are equal to one half the rise in the consumer price index. We are all in this together and all of us should bite the bullet together. There are many other things that I have not mentioned but have merit and all possibilities should be explored and where not absolutely devastating, implemented.

[…] not in amounts promised by politicians and guaranteed by taxpayers, but instead coming from actual investments — defined contributions, not defined benefits — in something like each one’s individual […]

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